The Phelps-Koopmans theorem and optimality

Debraj Ray

    Research output: Contribution to journalArticle

    Abstract

    The Phelps-Koopmans theorem states that if every limit point of a path of capital stocks exceeds the "golden rule," then that path is inefficient: there is another feasible path from the same initial stock that provides at least as much consumption at every date and strictly more consumption at some date. I show that in a model with nonconvex technologies and preferences, the theorem is false in a strong sense. Not only can there be efficient paths with capital stocks forever above and bounded away from a unique golden rule, such paths can also be optimal under the infinite discounted sum of a one-period utility function. The paper makes clear, moreover, that this latter criterion is strictly more demanding than the efficiency of a path.

    Original languageEnglish (US)
    Pages (from-to)11-28
    Number of pages18
    JournalInternational Journal of Economic Theory
    Volume6
    Issue number1
    DOIs
    StatePublished - 2010

    Keywords

    • Dynamic optimization
    • Efficiency
    • Nonconvexities
    • Phelps-koopmans theorem

    ASJC Scopus subject areas

    • Economics and Econometrics

    Fingerprint Dive into the research topics of 'The Phelps-Koopmans theorem and optimality'. Together they form a unique fingerprint.

  • Cite this